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State Owned Enterprises and Privatization Lecturer : Prof. Dr. Ulrich Wurzel Report on group Presentation: Why Government Steps in Again?A Comparative Analysis of Dominant Energy Sector SOEs of Russia, Brazil and China Volkan Emre 0534436 Turkey Berlin, February 2012
1. IntroductionThis paper aims to give a summary of the group presentation which was presented on the12th of January 2012. The main motivation of the presentation was to analyze differenttrends for increased governmental intervention and re-intervention in the energy marketsin Russia, Brazil and China in line with the main research question ‘Why government stepsin again?’.One of the major determinants of the future global economic growth is energy security forthe expanding world demand. Having a better understanding in increasing interest ofstate in energy market intervention is therefore very important.Presentation was divided in three main case studies from above listed countries. In eachcase selected monopolistic and oligopolistic SOEs (state owned enterprises) were subjectto the following questions: What are the reasons and motivations for re-intervention of governments in energy sector ? What is the relationship of intervention and energy prices ? Do the activities of the selected SOEs reflect success in achieving their objectives ? Do selected SOEs behave as an instrument of state rather than a private enterprise ? What are the main expectations and challenges for the future ?2. Energy pricesThe starting point was the analysis of energy prices in the last 20 years. Especially in thelast decade both oil and gas prices had been risen sharply. The main reasoning behindthose increases was the strong global economic growth which increased the demand inboth crude oil and natural gas. Table 1. Total energy real end-use price index for industry and households
Source: OECDSurprisingly the last decade was also a time period at which we observed severalnationalizations in the energy sector that led us question possible relationships betweenenergy prices and governmental interventions in the selected case studies.3. GazpromThe next point of the presentation was the evaluation of Gazprom as the gas giant ofRussia, that holds the world’s largest natural gas reserves . In the case of Russia we couldobserve both privatization and nationalization of the Gazprom and therefore a relativelyclearer line in re-intervention through increasing the government share compared withthe other selected state owned enterprises.After giving some background information about Gazprom, we discussed about therelationship between energy prices and re-intervention of the Russian state. Dependingon our analysis we concluded that there is a correlation between intervention and energyprices.The next step was a closer look at the motivations for re-intervention. Strategicimportance of the natural gas sector was listed as the first motivation. Subsidizing localconsumers and producers at reasonable prices was the second finding. Russia’s foreignpolicy which was described as ‘Export Monopoly Benefits’ especially in its main exportdestination to Europe, was defined as a major motivation.The third phase was questioning the autonomy of Gazprom. Depending on our argumentswe decided that signs of behaving as an instrument of state were more dominant thansigns of behaving as a private enterprise.Another interesting finding was that the re-intervention could not increase the net profitmargin, return on equity, return on capital despite the increasing trend of the natural gasprices. Those empirical findings allowed us to question the managerial efficiency of theRussian state in Gazprom’s activities.Progressive deregulation of the European Gas Market, stagnant production, insufficientinvestments, high dependence on the current pipeline systems and decline in the biggestfields were listed as the main challenges for Gazprom.
4. PetrobrasPetrobras, the largest company of Brazil and the Southern Hemisphere, was the secondSOE in the spotlight. We observed that the state intervention process was divided in threestages in this case. Those stages are respectively: Self sufficiency between 1972 to 1990s,going global between mid 1990s to 2000s and pre salt era from 2000s up to date.The first stage started right after the oil crises in 1970s. Petrobras was used as aninstrument of state to seek self sufficiency in oil extraction and production. Theinteresting point was that the international activities of the SOE during that time periodled to the second stage of going global. Petrobras focused more on market orienteddecisions rather than on its domestic monopoly benefits in order to become a globalplayer in the world oil market. But SOE still behaved in the interest of state; this time inline with Brazilian Foreign Policy. The final stage started under Lula administration. Thistime market oriented decisions changed their directions to the state led policies.Petrobras became a tool of Brazilian State’s the industrial and foreign policy by itsprocurement of high tech activities and products which are involved in ultra deep wateroil extraction and production.As in the Russian case, we concluded that the increasing trend in energy prices played animportant role in Brazilian State’s decisions in different time periods. Especially high costsof the deep water oil extraction activities need big investments and production costswould be only justified in case of high crude oil prices in the global markets.5. Chinese Petro - MajorsChina’s impressive economic growth rely heavily on the energy resources, especially onoil. There are three main state owned enterprises which came out in the late 1980s tosustain the energy supply security. CNPC was mandated to exploit onshore petroleumreserves, CNNOC to exploit offshore reserves and SINOPEC to refine petroleum.Unlike the other case studies, selected SOEs in China has been always dominantlycontrolled by state. With that regard, they never experienced large privatizations and re-nationalizations. However the intervention came with managerial reforms to re-organizeSOEs for the global competition by eliminating outmoded, uncompetitive and impracticalimplementations since the Chinese petroleum sector were practically useless in thepursuit of any external energy policy objective.Reorganization took place by separating state functions from SOEs and by breaking thetraditional upstream–downstream monopolies through the establishment of a
competitive environment. In different terms, state gave the autonomy to the SOEs by itsown willingness to make them more competitive within the state’s macroeconomicframework. On the other hand Chinese governments subsidized Chinese petro majorsenormously in direct and indirect ways. Subsidy and supports costs were high.Depending on our evaluation, the state intervention and reforms were successfulinternally and externally mainly due to remarkable increases in FDI and efficiency in thegiven time period. Additionally companies become more competitive. Companies wereable to execute state agendas better than when they were arms of public corporations’.Yet again, we observed some correlation between energy prices and intervention, but notas strong as in other two case studies.6. ConclusionsWe have discussed why government steps in the energy markets in three different casestudies. In each case we found different motivations. In the case of Gazprom we observedthe geopolitical benefits of export monopoly. On the other hand, Petrobras aims tomaintain technological investments to support the local industry and also gain exportrevenues. Finally, the Chinese petro –majors aimed to guarantee the security of energysupply for the growing domestic economy.In both case studies we observed correlations between government intervention andenergy prices with a few caveats. Activities of the selected state owned enterprisesreflected success in achieving their objectives in all cases. In that regard we alsoconcluded that both enterprises behave as instruments of states rather than privateenterprises. However. re-intervention success from market perspective was unclear.Sustainability and uncertainty of energy prices are defined as main challenges for theboth selected state owned enterprises’ future.One of the important findings was that re-intervention does not necessarily meanincreasing government share in the modern intervention context.Our final conclusion was that governments would consider their re-interventaionsuccessful because they feel that they act in the national interest which they do notmeasure only in economic terms.